Legislature(2003 - 2004)

02/09/2004 08:12 AM JUD

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE JUDICIARY STANDING COMMITTEE                                                                             
                        February 9, 2004                                                                                        
                           8:12 a.m.                                                                                            
                                                                                                                                
TAPE(S) 04-4&5                                                                                                                  
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Ralph Seekins, Chair                                                                                                    
Senator Gene Therriault                                                                                                         
Senator Hollis French                                                                                                           
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Senator Scott Ogan, Vice Chair                                                                                                  
Senator Johnny Ellis                                                                                                            
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
SENATE BILL NO. 300                                                                                                             
"An Act relating to an attorney's lien, to court actions, and to                                                                
other proceedings where attorneys are employed."                                                                                
     HEARD AND HELD                                                                                                             
                                                                                                                                
SENATE JOINT RESOLUTION NO. 18                                                                                                  
Proposing amendments to  the Constitution of the  State of Alaska                                                               
relating to  limiting appropriations from  and inflation-proofing                                                               
the Alaska  permanent fund  by establishing  a percent  of market                                                               
value spending limit.                                                                                                           
     HEARD AND HELD                                                                                                             
                                                                                                                                
SENATE JOINT RESOLUTION NO. 19                                                                                                  
Proposing amendments to the Constitution of the State of Alaska                                                                 
relating to the Alaska permanent fund.                                                                                          
     HEARD AND HELD                                                                                                             
                                                                                                                                
PREVIOUS ACTION                                                                                                               
                                                                                                                                
BILL: SB 300                                                                                                                  
SHORT TITLE: ATTORNEY'S LIEN                                                                                                    
SENATOR(s): STEDMAN                                                                                                             
                                                                                                                                
02/06/04       (S)       READ THE FIRST TIME - REFERRALS                                                                        
02/06/04       (S)       JUD, FIN                                                                                               
                                                                                                                                
BILL: SJR 18                                                                                                                  
SHORT TITLE: CONST. AM: PF APPROPS/INFLATION-PROOFING                                                                           
SENATOR(s): RLS BY REQUEST OF LEG BUDGET & AUDIT BY REQUEST                                                                     
                                                                                                                                
04/17/03       (S)       READ THE FIRST TIME - REFERRALS                                                                        
04/17/03       (S)       STA, JUD, FIN                                                                                          
05/01/03       (S)       STA AT 3:30 PM BELTZ 211                                                                               
05/01/03       (S)       Heard & Held                                                                                           
05/01/03       (S)       MINUTE(STA)                                                                                            
05/06/03       (S)       STA AT 3:30 PM BELTZ 211                                                                               
05/06/03       (S)       Moved CSSJR 18(STA) Out of Committee                                                                   
05/06/03       (S)       MINUTE(STA)                                                                                            
05/07/03       (S)       STA RPT CS 1DP 3NR            NEW TITLE                                                                
05/07/03       (S)       NR: STEVENS G, DYSON, GUESS;                                                                           
05/07/03       (S)       DP: COWDERY                                                                                            
05/13/03       (S)       JUD AT 8:00 AM BELTZ 211                                                                               
05/13/03       (S)       Scheduled But Not Heard                                                                                
05/14/03       (S)       JUD AT 0:00 AM BELTZ 211                                                                               
05/14/03       (S)       -- Meeting Postponed to 5/15/03 --                                                                     
05/15/03       (S)       JUD AT 8:45 AM BELTZ 211                                                                               
05/15/03       (S)       -- Meeting Rescheduled from 5/14/03 --                                                                 
10/28/03       (S)       JUD AT 7:00 PM Kenai                                                                                   
10/28/03       (S)       CONST. AM: PERMANENT FUND INCOME                                                                       
10/29/03       (S)       JUD AT 7:00 PM Mat-Su LIO                                                                              
10/29/03       (S)       CONST. AM: PERMANENT FUND INCOME                                                                       
10/30/03       (S)       JUD AT 7:00 PM Anch LIO                                                                                
10/30/03       (S)       CONST. AM: PERMANENT FUND INCOME                                                                       
01/21/04       (S)       JUD AT 8:00 AM BELTZ 211                                                                               
01/21/04       (S)       -- Meeting Canceled --                                                                                 
                                                                                                                                
BILL: SJR 19                                                                                                                  
SHORT TITLE: CONST. AM: PERMANENT FUND INCOME                                                                                   
SENATOR(s): LINCOLN, Ellis                                                                                                      
                                                                                                                                
05/02/03       (S)       READ THE FIRST TIME - REFERRALS                                                                        
05/02/03       (S)       STA, JUD, FIN                                                                                          
05/13/03       (S)       STA AT 3:30 PM BELTZ 211                                                                               
05/13/03       (S)       Moved Out of Committee                                                                                 
05/13/03       (S)       MINUTE(STA)                                                                                            
05/14/03       (S)       STA RPT 1DP 3NR                                                                                        
05/14/03       (S)       NR: STEVENS G, COWDERY, DYSON;                                                                         
05/14/03       (S)       DP: GUESS                                                                                              
05/16/03       (S)       JUD AT 1:00 PM BELTZ 211                                                                               
05/16/03       (S)       Scheduled But Not Heard                                                                                
05/17/03       (S)       JUD AT 10:00 AM BELTZ 211                                                                              
05/17/03       (S)       Heard & Held                                                                                           
05/17/03       (S)       MINUTE(JUD)                                                                                            
10/28/03       (S)       JUD AT 7:00 PM Kenai                                                                                   
10/29/03       (S)       JUD AT 7:00 PM Mat-Su LIO                                                                              
10/30/03       (S)       JUD AT 7:00 PM Anch LIO                                                                                
01/21/04       (S)       JUD AT 8:00 AM BELTZ 211                                                                               
01/21/04       (S)       -- Meeting Canceled --                                                                                 
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                              
Senator Bert Stedman                                                                                                            
Alaska State Capitol                                                                                                            
Juneau, AK  99801-1182                                                                                                          
POSITION STATEMENT:  Sponsor of SB 300                                                                                        
                                                                                                                                
Mr. William Schendell, Attorney                                                                                                 
Fairbanks, AK                                                                                                                   
POSITION STATEMENT:  Supports SB 300                                                                                          
                                                                                                                                
Mr. Ken Covell, Attorney                                                                                                        
Fairbanks, AK                                                                                                                   
POSITION STATEMENT:  Supports SB 300                                                                                          
                                                                                                                                
Ms. Jo Kuchle, Attorney                                                                                                         
Fairbanks, AK                                                                                                                   
POSITION STATEMENT:  Supports SB 300                                                                                          
                                                                                                                                
Mr. Kevin Walsh, CPA                                                                                                            
Fairbanks, AK                                                                                                                   
POSITION STATEMENT:  Supports SB 300                                                                                          
                                                                                                                                
Mr. Robert Storer                                                                                                               
Executive Director                                                                                                              
Alaska Permanent Fund Corporation                                                                                               
PO Box 25500                                                                                                                    
Juneau, AK 99802-5500                                                                                                           
POSITION STATEMENT:  Answered questions regarding SJR 18                                                                      
                                                                                                                                
Representative Eric Croft                                                                                                       
Alaska State Capitol                                                                                                            
Juneau, AK  99801-1182                                                                                                          
POSITION STATEMENT: Presented SJR 19 for Senator Lincoln                                                                      
                                                                                                                                
Mr. Mark Stopha                                                                                                                 
Staff to Senator Lincoln                                                                                                        
Alaska State Capitol                                                                                                            
Juneau, AK  99801-1182                                                                                                          
POSITION STATEMENT: Available to answer questions about SJR 19                                                                
                                                                                                                                
Mr. Roger Gay                                                                                                                   
Big Lake, AK 99652                                                                                                              
POSITION STATEMENT:  Opposed to inflation proofing  the permanent                                                             
fund                                                                                                                            
                                                                                                                                
Mr. Gary Hanthorn                                                                                                               
Wasilla, AK 99654                                                                                                               
POSITION STATEMENT: Supports keeping  the permanent fund dividend                                                             
program                                                                                                                         
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
TAPE 04-4, SIDE A                                                                                                             
                                                                                                                                
CHAIR  RALPH   SEEKINS  called  the  Senate   Judiciary  Standing                                                             
Committee meeting  to order  at 8:12  a.m.   Senators Therriault,                                                               
French  and  Chair  Seekins  were   present.  He  announced  that                                                               
Senators  Ellis  and Ogan  would  not  be attending  the  meeting                                                               
today. The first  order of business to come  before the committee                                                               
was SB 300.                                                                                                                     
                                                                                                                                
                     SB 300-ATTORNEY'S LIEN                                                                                 
                                                                                                                                
SENATOR BERT STEDMAN, prime sponsor  of SB 300, told members that                                                               
SB 300  is a  housekeeping measure to  avoid double  taxation. He                                                               
explained   that  when   court  settlements   are  awarded,   the                                                               
prevailing  party must  pay income  tax on  phantom income  - the                                                               
gross amount  of the  award even  though part  of that  income is                                                               
paid to the  party's attorney. The attorney must then  pay tax on                                                               
the income received, resulting in  double taxation. The structure                                                               
of  the system  in the  State of  Oregon differs  so that  if the                                                               
proper documents are  filed, the court settlement is  paid to the                                                               
attorney who,  after retaining attorney fees,  pays the remainder                                                               
to the  client, thereby avoiding double  taxation. Attorneys have                                                               
structured  trust accounts  to hold  court  settlements, so  this                                                               
mechanism would pose no danger to the client.                                                                                   
                                                                                                                                
8:16 a.m.                                                                                                                       
                                                                                                                                
SENATOR  HOLLIS FRENCH  asked for  an example  to illustrate  the                                                               
double taxation problem.                                                                                                        
                                                                                                                                
SENATOR  STEDMAN said  a wrongfully  damaged  plaintiff might  be                                                               
awarded  $10,000. The  plaintiff would  have to  claim income  of                                                               
$10,000 and  pay tax  on that amount,  $2,000 if  the plaintiff's                                                               
tax  bracket was  20  percent.  The plaintiff  must  also pay  30                                                               
percent of the  $10,000 for attorney fees,  equaling 3,000. Then,                                                               
the  attorney must  pay tax  on his  fee of  $3,000. SB  300 will                                                               
avoid  double taxation  by paying  the attorney  off the  top, so                                                               
that the plaintiff would claim gross revenue of $7,000.                                                                         
                                                                                                                                
SENATOR FRENCH surmised  that two parties would  be paying income                                                               
tax on the $3,000.                                                                                                              
                                                                                                                                
SENATOR STEDMAN said that is correct.  He said there is no way an                                                               
attorney could avoid  paying taxes on his or her  fees, so SB 300                                                               
will  not affect  the  attorney.  It will,  however,  have a  big                                                               
impact on the citizen who must pay tax on the attorney fees.                                                                    
                                                                                                                                
SENATOR  GENE  THERRIAULT  asked  if  the  way  to  avoid  double                                                               
taxation is to  have the attorney file the  proper lien paperwork                                                               
so  that the  jury award  becomes the  property of  the attorney.                                                               
Then, once the attorney's lien is  paid, the remainder is paid to                                                               
the client via contract.                                                                                                        
                                                                                                                                
SENATOR STEDMAN  said that is  correct and that the  client would                                                               
pay taxes on  the actual amount paid to him  or her. He clarified                                                               
that the award  funds paid to the attorney would  be protected by                                                               
a litany of regulations to provide safety for the client.                                                                       
                                                                                                                                
SENATOR THERRIAULT asked  if SB 300 passes, the  plaintiff in the                                                               
previous  example would  receive  $7,000 and  the attorney  would                                                               
receive  $3,000, while  under the  current system,  the plaintiff                                                               
would only receive $5,000.                                                                                                      
                                                                                                                                
SENATOR STEDMAN said that is correct.                                                                                           
                                                                                                                                
SENATOR FRENCH  asked if  any damage award  would go  directly to                                                               
the attorney.                                                                                                                   
                                                                                                                                
SENATOR STEDMAN  said yes, if  the attorney has filed  the proper                                                               
liens, and the attorney would  disburse the funds directly to the                                                               
client. The plaintiff  would then claim only  the income received                                                               
from the attorney, not the gross amount.                                                                                        
                                                                                                                                
SENATOR  FRENCH  noted  letters  of  support  from  attorneys  in                                                               
members' files  but asked if  Senator Stedman has heard  from any                                                               
plaintiffs who  are concerned that  attorneys might sit  on their                                                               
money for too long.                                                                                                             
                                                                                                                                
CHAIR SEEKINS said  that witnesses were available  to testify and                                                               
might be able to answer that question. He took public testimony.                                                                
                                                                                                                                
MR. WILLIAM SCHENDEL, an attorney  who has practiced in Fairbanks                                                               
for about 30 years, told members  that the issue behind SB 300 is                                                               
double  taxation and  is one  of  the biggest  problems that  has                                                               
faced both employers  and employees over the last  five years. In                                                               
essence, the  plaintiff is  taxed on the  attorney fees  that the                                                               
plaintiff does  not receive.  The consequence  of that  system is                                                               
that the  plaintiff is prompted to  try to recover more  from the                                                               
defendant, typically  the employer, and  that drives up  the cost                                                               
of settlements. SB 300 will do  away with double taxation so that                                                               
the plaintiff is only taxed on the net award.                                                                                   
                                                                                                                                
MS. JO  KUCHLE, a Fairbanks  attorney for 17 years,  told members                                                               
that regarding the  trust account issue, the funds  do not always                                                               
flow  through the  trust account;  sometimes the  funds are  paid                                                               
directly  to the  prevailing party.  She said  under the  current                                                               
scheme this issue not only  arises with settlements, it can occur                                                               
with judgments or  in any case in which the  prevailing party has                                                               
won damages and pays attorney fees. She pointed out:                                                                            
                                                                                                                                
     This has  been primarily the  result of rulings  by the                                                                    
     Ninth  Circuit Court  of Appeals,  which has  basically                                                                    
     determined  that  for  federal tax  purposes,  the  fee                                                                    
     award, though it goes directly  to the taxpayer and the                                                                    
     taxpayer has  to pay the attorney,  gets taxed entirely                                                                    
     to  the  taxpayer.  They carved  out  an  exception  in                                                                    
     Oregon  on  Oregon's lien  law.  That's  why the  group                                                                    
     before you  has requested, and we're  very pleased that                                                                    
     Senator Stedman  has introduced  this bill,  to correct                                                                    
     this  disparity  with  Oregon taxpayers  and  that  all                                                                    
     taxpayers really in  the Ninth Circuit -  all states in                                                                    
     the  Ninth  Circuit  are   affected  by  this  taxpayer                                                                    
     [indisc.].                                                                                                                 
                                                                                                                                
MR. KEN COVELL,  a Fairbanks attorney for 18  years, told members                                                               
he focuses on personal injury and  employment law, and that he is                                                               
concerned that in civil rights  actions, a plaintiff will receive                                                               
nominal  damages   of  $1.  However,  attorney   fees  are  often                                                               
$100,000.  These  cases  are often  very  important  and  involve                                                               
racial discrimination.  It is conceivable that  a plaintiff could                                                               
receive a  $1 award but have  a $30,000 tax liability  because of                                                               
the  $100,000 attorney  fee. He  pointed out  that clients  often                                                               
take  on  such  cases  at  great  emotional  and  personal  risk.                                                               
Therefore, if  an attorney has to  tell that client he  or she is                                                               
liable for  an additional  $30,000 tax,  clients will  not pursue                                                               
important  cases. SB  300 would  put  the citizens  of Alaska  on                                                               
equal footing with citizens of  various other states. He repeated                                                               
that the  current system  creates a  disincentive for  clients to                                                               
pursue important issues.                                                                                                        
                                                                                                                                
MR. KEVIN WALSH,  a certified public accountant  in Fairbanks for                                                               
25 years,  thanked members for  considering SB 300. He  said this                                                               
issue is  near and dear  to him as he  runs into this  problem in                                                               
his  tax  practice  and  must  advise  potential  plaintiffs.  It                                                               
creates different classes of  taxpayers and affects opportunities                                                               
that  people have  to  correct injustices  changes  based on  tax                                                               
advice. He  considers that to  be wrong and  looks to SB  300 for                                                               
resolution. He  said this  issue is based  on federal  income tax                                                               
law,  which is  based on  taxing the  owner of  income. A  recent                                                               
Supreme  Court decision  basically said,  "tax the  fruit of  the                                                               
tree to the tree from which it  falls." This lien law is based on                                                               
establishing property rights  - who owned the case  and who owned                                                               
what  right under  the case.  Current  federal tax  law says  the                                                               
entire  case  belongs to  the  plaintiff;  therefore all  amounts                                                               
flowing  from  that  case  are   taxable  to  the  plaintiff.  He                                                               
explained:                                                                                                                      
                                                                                                                                
     Then, if the  plaintiff is allowed a  deduction for the                                                                    
     amount of  the attorney fees  that they pay,  then they                                                                    
     end up  [indisc.] income  tax only  on the  net amount.                                                                    
     This  is  absolutely  true for  any  business  that  is                                                                    
     successful  in a  suit.  Businesses  report the  entire                                                                    
     damage  amount as  income, deduct  all of  the attorney                                                                    
     fees.  They only  pay  income tax  on  the net  amount.                                                                    
     People that are injured  in a personal injury situation                                                                    
     don't pay taxes at all. This  is not an issue for them.                                                                    
     So it  boils down to  the only people impacted  on this                                                                    
     are  the employees.  Employees who  bring suit  against                                                                    
     their  employers   for  whatever  reason  and   end  up                                                                    
     successful, end  up having to report  the entire amount                                                                    
     of the  attorney fees  and their  own award  as income.                                                                    
     They are then  allowed a deduction for  the amount that                                                                    
     they pay the attorneys.                                                                                                    
                                                                                                                                
     Unfortunately the deduction is  limited to two separate                                                                    
     distinct  events:   one,  it  is  only   allowed  as  a                                                                    
     miscellaneous  itemized deduction  and  limited to  the                                                                    
     amount that  exceeds 2 percent of  their adjusted gross                                                                    
     income.... Unfortunately, the  alternative minimum tax,                                                                    
     which if you  have - is a parallel tax  system that was                                                                    
     established many years  ago to make sure  that the rich                                                                    
     paid   at  least   a  minimum   tax  every   year,  the                                                                    
     consequence  of  that  tax  is  that  no  miscellaneous                                                                    
     itemized  deductions  of  any   type  are  allowed  for                                                                    
     purposes of  computing that tax  and then the  tax rate                                                                    
     is  25, 28  percent applied  to the  net income  coming                                                                    
     from that.                                                                                                                 
                                                                                                                                
     So let  me give you a  real live example coming  out of                                                                    
     our  practice. We  had a  public interest  litigant, an                                                                    
     employee  who was  [indisc.].  They sued  successfully.                                                                    
     The received  approximately $105,000.  Their attorney's                                                                    
     fees were $100,000  and that was understood  to be part                                                                    
     of  the award.  In other  words, their  net amount  was                                                                    
     about $5,000. They ended up  with a tax bill associated                                                                    
     with  that of  approximately $30,000.  In other  words,                                                                    
     understand,  they  got  to  keep  $5,000  and  had  the                                                                    
     obligation to  pay $30[,000],  so by  taking corrective                                                                    
     action through  the judicial system  to get a  court to                                                                    
     correct an  employer's egregious behavior, they  had to                                                                    
     reach  in  their  pocket  and  take  out  approximately                                                                    
     $25,000.  I  consider  that  to  be  a  miscarriage  of                                                                    
     justice.                                                                                                                   
                                                                                                                                
MR. WALSH  gave other examples and  said that the origin  of this                                                               
situation  is based  on  property law  in  Alabama, Michigan  and                                                               
Oregon. The  court reviewed it  and found the attorneys  in those                                                               
cases  had a  sufficient property  right in  their piece  of that                                                               
case so that  income was taxed to them and  not to the taxpayers.                                                               
The Alaska  Supreme Court  has reviewed this  issue and  said the                                                               
person receiving  the award  "gets the  shaft." He  said Alaska's                                                               
law should be  changed so that a public interest  litigant is not                                                               
penalized.   He  noted   the  Supreme   Court  has   had  several                                                               
opportunities to correct the disparity  between the circuit court                                                               
and has basically said it  does not care. Similarly, Congress has                                                               
had  the opportunity  to take  this matter  up several  times but                                                               
declined to do so. He encouraged the Legislature to take action.                                                                
                                                                                                                                
8:37 a.m.                                                                                                                       
                                                                                                                                
CHAIR SEEKINS asked, "As I  understand it, this lien exists until                                                               
it  is satisfied  and  only affects  the  previously agreed  upon                                                               
fees. Is that correct?"                                                                                                         
                                                                                                                                
MR. COVELL said that is correct.                                                                                                
                                                                                                                                
CHAIR SEEKINS asked if SB  300 passes, the prevailing party would                                                               
pay taxes only on the award less the attorney fees.                                                                             
                                                                                                                                
MR. COVELL agreed.                                                                                                              
                                                                                                                                
CHAIR  SEEKINS  asked   if  SB  300  will   correct  the  current                                                               
disparity.                                                                                                                      
                                                                                                                                
MR. COVELL said it would.                                                                                                       
                                                                                                                                
CHAIR SEEKINS  asked if it  would have  any fiscal impact  on the                                                               
State of Alaska.                                                                                                                
                                                                                                                                
MR. COVELL said it would not.                                                                                                   
                                                                                                                                
SENATOR  THERRIAULT asked  if attorney  fees and  the costs  of a                                                               
case  are  categorized  separately  and  whether  they  would  be                                                               
treated the same way.                                                                                                           
                                                                                                                                
MR. COVELL  said he believes  so; nothing would change  in regard                                                               
to cost.                                                                                                                        
                                                                                                                                
CHAIR SEEKINS  said as is  the common practice of  the committee,                                                               
he would  hold the  bill for  a second hearing  to see  if anyone                                                               
else wants to comment. He said  he believes SB 300 is good public                                                               
policy and thanked all participants.                                                                                            
                                                                                                                                
[The following is a verbatim transcript.]                                                                                       
                                                                                                                                
        SJR 18-CONST. AM: PF APPROPS/INFLATION-PROOFING                                                                     
                                                                                                                                
CHAIR RALPH  SEEKINS: Okay, next  we're going  to move on  to our                                                               
second item,  which is  CSSJR 18[STA].  We're looking  at version                                                               
[H]. A little  bit of history on  this bill - we  have had public                                                               
hearings across the state. We  had public hearings this summer in                                                               
Fairbanks;  we had  public hearings  in Kenai,  in Mat-Su  and in                                                               
Anchorage. Today is  our last opportunity for  public hearings on                                                               
this particular bill and then  for any questions from the members                                                               
that are  present. Do we  have anyone  who would like  to testify                                                               
today on  CSSJR 18? I  see Mr. Storer  is here from  the [Alaska]                                                               
Permanent Fund [Corporation] and I  think the members pretty much                                                               
understand what the proposal is  here. Is there anything that you                                                               
would wish  to add  to what  you guys  have testified  on already                                                               
four times across the state?                                                                                                    
                                                                                                                                
MR.  ROBERT STORER,  EXECUTIVE  DIRECTOR,  ALASKA PERMANENT  FUND                                                               
CORPORATION: Thank  you Mr. Chair.  We're prepared to  answer any                                                               
questions that you may have.                                                                                                    
                                                                                                                                
CHAIR SEEKINS: We'll  hold you to stand by for  any questions. Is                                                               
there anyone  on-line that  would like to  testify on  this bill?                                                               
[No response.] Anyone in the  audience that would like to testify                                                               
on CSSJR  18? [No response.]  Mr. Storer, perhaps you  could take                                                               
the chair  in case we do  have any questions from  members of the                                                               
committee?  Anyone signed  up Mr.  Hove? [No  one signed  up.] At                                                               
this point, we're going to close  public testimony on this CS for                                                               
SJR 18. Public testimony is  closed. Questions from the members -                                                               
any  questions,  comments?  Here's  our opportunity  to  ask  the                                                               
expert  as to  what the  formula  that they  originated from  the                                                               
trustees of the  permanent fund is in this  resolution that we're                                                               
considering today. Senator Therriault?                                                                                          
                                                                                                                                
SENATOR THERRIAULT: Mr.  Storer, I know one of  the concerns that                                                               
has come up  is that with the allowable up  to five percent draw,                                                               
there  could  be  some  erosion   of  the  principal  in  a  down                                                               
investment  market or  climate. I  know  that you  have run  some                                                               
models  historically looking  back to  see [indisc.]  toss around                                                               
some  different  ideas   of  how  we  could   prevent  that  from                                                               
happening. I'm wondering if you could just go over that?                                                                        
                                                                                                                                
MR. STORER: Thank  you, Mr. Chair. I'm Bob  Storer, the Executive                                                               
Director  of  the  Alaska  Permanent  Fund  Corporation.  Senator                                                               
Therriault, I  have handouts from two  views if I could  ask that                                                               
those be distributed?  We take the longer term view  so the first                                                               
thing we looked at was what was  the real rate of return based on                                                               
a 10-year rolling average of the  history of the fund. And if you                                                               
look at  that, you'll  see that  in all time  periods -  I should                                                               
describe  the chart  -  zero and  above is  the  excess return  -                                                               
earnings  of the  fund above  inflation so  zero and  below would                                                               
incorporate inflation.  This is zero  and above is the  real rate                                                               
of return  of the  permanent fund.  And then  we've driven  a red                                                               
line  through the  5  percent  real rate  of  return because,  of                                                               
course, that's our proposed constitutional amendment.                                                                           
                                                                                                                                
You'll see on  a rolling 10-year period, during  all time frames,                                                               
we have been able to achieve a  5 percent real rate of return and                                                               
that includes  the most  recent period  where we  experienced not                                                               
only very  high rates of return  in the bull market  but a 3-year                                                               
bear market as  well. In fact, we earned a  5.3 percent real rate                                                               
of return  for that 10-year  period and you'll see  it's trending                                                               
back  and we've  extrapolated what  we think  we'll earn  through                                                               
this whole fiscal year.                                                                                                         
                                                                                                                                
So that's  one way of  looking at it.  But many people  have said                                                               
well what happens, you've got -  it's on a rolling 5-year rate of                                                               
return, so what  happens if you look at a  5-year rolling rate of                                                               
return perspective and you'll see  I've also provided a graph for                                                               
you  on that  as  well. And  you'll note  that  in virtually  all                                                               
periods we  have earned  an excess  rate of  return of  5 percent                                                               
real, with the  exception of most recent history when  we had the                                                               
3-year  bear  market  and  you'll  see  that  over  those  5-year                                                               
observations most recently, we still  were able to achieve a real                                                               
rate of return,  albeit below 5 percent,  slightly above probably                                                               
about 1 percent, etcetera. Now  it's trending upwards because the                                                               
returns  have  been   so  good  over  that   period.  This  chart                                                               
highlights what  I believe is  the importance of the  POMV, which                                                               
is limiting  or creating the  discipline to not overspend  in the                                                               
good years. If  you look at that chart, by  not overspending, and                                                               
the legislature did  not, they created the  cushion, the reserves                                                               
that actually  would allow us  to meet, or allow  decision makers                                                               
to meet,  the payments in the  down years. So I  think this chart                                                               
illustrates, in my mind, the  importance of the discipline in the                                                               
good years to create a reserve for the down years.                                                                              
                                                                                                                                
CHAIR SEEKINS: Go ahead Senator Therriault.                                                                                     
                                                                                                                                
SENATOR THERRIAULT: Just  so I can make sure I  understand this -                                                               
so the zero line incorporates covering inflation?                                                                               
                                                                                                                                
MR. STORER: Correct.                                                                                                            
                                                                                                                                
CHAIR SEEKINS: Senator French?                                                                                                  
                                                                                                                                
SENATOR HOLLIS FRENCH: Mr. Storer,  I had a conversation with Mr.                                                               
Bartholomew  this summer  and I  explained  my chief  reservation                                                               
about this  proposal and that  is in the  same area that  I think                                                               
Senator  Therriault  was  just  asking  about  and  that  is  the                                                               
inflation proofing. The  quarterly report you guys  mailed out to                                                               
me at  my home late in  the summer, early September,  showed that                                                               
the annualized 5-year return for  the years ending June 30, 2003,                                                               
that is  going back 5 years  from there, the total  fund returned                                                               
3.39 percent. That's the kind of  scenario I guess that most - at                                                               
least I  am concerned about,  that we could  go into a  time that                                                               
we're not making  a lot of money and we're  taking this 5 percent                                                               
out and  you start  to claw  into the fund.  I think  that really                                                               
sort of highlights  one of the difficulties in  the proposal, and                                                               
that is  that if you  really believe you  can take out  5 percent                                                               
regularly,  after inflation  proofing, and  if one  of the  chief                                                               
selling points  of the  model is that  it provides  a predictable                                                               
payout, that  is somewhat  undercut by the  idea that,  well, you                                                               
don't have  to take that 5  percent in bad years.  I think that's                                                               
one of  the faults, if  you will, in the  premise of the  POMV is                                                               
that  you're going  to  have this  predictable  5 percent  payout                                                               
except in bad years  when you don't do that. Once  I think you go                                                               
to telling  folks you're going to  have a 5 percent  payout, it's                                                               
going to  be very, very difficult  to take something less  than 5                                                               
percent. So  I guess my  concern is that  in bad years,  in years                                                               
where you get a 3.39  percent annualized return, you haven't made                                                               
your 5  percent and  you haven't  inflation proofed  either. That                                                               
strikes me as clawing into the principal of the fund.                                                                           
                                                                                                                                
CHAIR SEEKINS:  Let me ask a  couple of questions so  that we can                                                               
take a look at  this when we talk about this.  You know I've been                                                               
a used  car salesman for a  long time. What's the  present market                                                               
value of the fund, roughly?                                                                                                     
                                                                                                                                
MR. STORER: It's in excess of $27 billion right now.                                                                            
                                                                                                                                
CHAIR  SEEKINS:  Okay,  so  we've  got  27  billion.  What's  the                                                               
principal of the fund?                                                                                                          
                                                                                                                                
MR. STORER: That's - I was afraid  you were going to ask me that.                                                               
I've  been  traveling  so  much  but I  think  it's  about  $22.5                                                               
billion.                                                                                                                        
                                                                                                                                
CHAIR SEEKINS:  So with that in  mind, we've got $4.5  billion in                                                               
market  value that  exceeds the  current principal  value of  the                                                               
fund?                                                                                                                           
                                                                                                                                
MR. STORER: Um-hum.                                                                                                             
                                                                                                                                
CHAIR SEEKINS: So we'd have to  have a couple of really bad years                                                               
before we  started eating  into the principal  if we  started now                                                               
with a 5 percent payout - is that correct?                                                                                      
                                                                                                                                
MR. STORER: That is correct.                                                                                                    
                                                                                                                                
CHAIR SEEKINS:  So there's  a cushion  already there  that exists                                                               
because of the  discipline of the legislature in the  past and so                                                               
we should  not confuse market value  as principal - am  I correct                                                               
there Mr. Storer?                                                                                                               
                                                                                                                                
MR. STORER: I  think that's an important issue. I  think you've -                                                               
in  my mind,  I'd  like  to address  a  couple  of things  there.                                                               
Everywhere I've  seen in the United  States over the last  - as a                                                               
result of the  bear market, is everyone  got caught overspending.                                                               
Not  everyone,  but I  can  cite  you  example after  example  of                                                               
overspending in the  good years - they got caught  up in the bull                                                               
market mania.  I believe the  best way -  this is what  I believe                                                               
personally, I believe  it strongly - the best way  to protect the                                                               
principal is to create the discipline  not to overspend. If I add                                                               
some responses  to Senator French's comments,  I've thought about                                                               
that a  lot over  the summer  because I  know it's  important not                                                               
just to you  but to many people, and my  response has always been                                                               
as it relates  to the POMV, and  again I send you  to the 10-year                                                               
period, which  says that in  fact, we  have been able  to achieve                                                               
that goal but we well may not in the future.                                                                                    
                                                                                                                                
The problem exists under the current  system as well and we can't                                                               
forget  that.  So then  it  becomes  each  system  has a  set  of                                                               
decisions or parameters  around it based on the  statutes, or the                                                               
guidelines, or what matters. You  are correct, if decision makers                                                               
wished  in a  low  real rate  of return  period  to distribute  5                                                               
percent, we  say the stability,  the predictability -  it's there                                                               
or it's  not there.  Under the  current system,  and you  know we                                                               
have varying  scenarios, we  had a  real rate  of return  there -                                                               
what happens if we get a  negative real rate of return? Under the                                                               
current system,  depending, you  have the  same problems  but you                                                               
can also  hit that principal  and theoretically go  several years                                                               
without any payment at all. Then  you've got this 22 - 27 billion                                                               
dollar fund  that does nothing  until the market value  goes back                                                               
above. And  so it's a  decision. It's an important  decision. One                                                               
gives you the  flexibility. The other, in a  really bad scenario,                                                               
you wait  or you change  the Constitution to  eliminate principal                                                               
then.  So the  problem doesn't  go away  in either  way. It  just                                                               
manifests itself in a slightly different way.                                                                                   
                                                                                                                                
CHAIR  SEEKINS:  And so,  I  see  - as  you  know  I was  on  the                                                               
Permanent  Fund Board  of Trustees  and I  can see  all kinds  of                                                               
different scenarios where  even the current system  could be used                                                               
to actually spend into the  principal by selling losers and other                                                               
different ways  to be able to  do that to produce  revenue into -                                                               
well  it wouldn't  produce revenue  but we  could actually  spend                                                               
into the principal at this time. Is that correct?                                                                               
                                                                                                                                
MR. STORER:  If you -  on the current, you  can take income  - if                                                               
realized income is  available you can distribute that.  So if you                                                               
had realized  income and  then unrealized  losses, you  could pay                                                               
out and then  the value of the fund would  be below principal, as                                                               
an example.                                                                                                                     
                                                                                                                                
CHAIR SEEKINS: What  do we do with rents and  royalties? Where do                                                               
we classify those?                                                                                                              
                                                                                                                                
MR. STORER: Those are realized income.                                                                                          
                                                                                                                                
CHAIR SEEKINS: So  we could be losing in the  market and not sell                                                               
it because that's unrealized losses.                                                                                            
                                                                                                                                
MR. STORER: That is correct.                                                                                                    
                                                                                                                                
CHAIR SEEKINS:  And be  bringing in rents  and royalties  that we                                                               
call realized  income and that  goes to distribution  even though                                                               
we're losing our shirt in the markets?                                                                                          
                                                                                                                                
MR.  STORER:  Under  the  current   system  that's  correct,  Mr.                                                               
Chairman. And  the other question  in all  of this is,  under the                                                               
current system  is would inflation  proofing continue or  not. It                                                               
always has in the past through the statutory process.                                                                           
                                                                                                                                
CHAIR  SEEKINS: I  always ask  the question  on that  - if  I was                                                               
looking at my  own family, you know, the question  I ask is would                                                               
I inflation  proof it if I  couldn't feed my kids?  Easy decision                                                               
but if I look at this then, if  I understand my math was wrong as                                                               
I  look at  it, $27  billion market  fund -  market value,  $22.5                                                               
[billion] principal  - that's $4.5 billion  between principal and                                                               
market value.  If we were taking  5 percent of that  market value                                                               
now, it would take us three years to get down to principal?                                                                     
                                                                                                                                
MR. STORER: If we didn't earn anything.                                                                                         
                                                                                                                                
CHAIR SEEKINS: If  we didn't earn anything, so  there's a cushion                                                               
that's  there and  I don't  think a  lot of  people in  the state                                                               
understand that  that cushion exists  because they only  think in                                                               
terms of the market value, not the principal value.                                                                             
                                                                                                                                
MR. STORER:  At one time, Mr.  Chair, 25 percent of  the fund was                                                               
either realized income or unrealized  gains, in about 1999, early                                                               
2000.                                                                                                                           
                                                                                                                                
CHAIR SEEKINS: Okay. Senator French?                                                                                            
                                                                                                                                
SENATOR FRENCH: But my understanding  is when you enact the POMV,                                                               
you eradicate  that difference.  As soon as  you enact  POMV, you                                                               
stop thinking about principal and  earnings. You make one big pot                                                               
of money,  and it's going to  be about $27 billion  and from that                                                               
day  forward,  Alaskans  are  going   to  regard  that  as  their                                                               
permanent  fund and  they're not  going to  differentiate between                                                               
what it's  earned and  what it  hasn't earned.  And I  think from                                                               
that  day  forward,  we're  going  to  have  to  give  them  some                                                               
reasonable and, I think, explicit  promise of inflation proofing.                                                               
If  these  models hold  true,  then  for  us to  write  inflation                                                               
proofing in  the Constitution  is no  risk at  all to  the fiscal                                                               
stability of  the state. But,  if I  can finish, I  have concerns                                                               
about whether  this model  is going  to hold  true over  the long                                                               
run.  We haven't  seen a  crushing period  of inflation  for some                                                               
time  now, not  since the  late '70s  and early  '80s. The  first                                                               
president I  ever voted  for was  Jimmy Carter.  Then I  moved to                                                               
Alaska  and  found  out  what  a bad  idea  that  was  from  many                                                               
Alaskans' point of  view. And during that time  period, there was                                                               
terrible,  terrible  inflation and  I  think,  given the  federal                                                               
deficits that are being run up  here in this country, the largest                                                               
ever  in the  history of  the nation,  sooner or  later the  bond                                                               
market is  going to have  to react to  that and I  think interest                                                               
rates are going to have to go  up. And so I'm just concerned that                                                               
unless we  put some positive  guarantee of inflation  proofing on                                                               
paper -  because in your  system, inflation proofing  is implicit                                                               
and  I'd like  to  make  it explicit.  I  guess  that's my  chief                                                               
concern.                                                                                                                        
                                                                                                                                
MR.  STORER:  Mr. Chair,  first  off  I've  looked  at a  lot  of                                                               
scenarios and the worst case  scenario, in either case I believe,                                                               
is, I'll call it hyper-inflation.  We can handle rising inflation                                                               
to some degree  but if we revisit  the '70s - the  '70s, like the                                                               
Depression, were  the two very  singular events. Can  they happen                                                               
again? Of course they can  happen. That's the worst-case scenario                                                               
under either scenario. It seems to  be, well, if it happens, it's                                                               
not  in the  foreseeable future.  But the  one thing  I want  - a                                                               
couple of  elected officials have  asked me to  provide statutory                                                               
guidance, statutory insight  that essentially addresses precisely                                                               
what you're talking  about - about memorializing  the guidance by                                                               
statute.                                                                                                                        
                                                                                                                                
CHAIR SEEKINS:  And I understand  that. In fact, I  would support                                                               
that. Go ahead, Senator Therriault.                                                                                             
                                                                                                                                
SENATOR  THERRIAULT: If  we got  into a  situation like  the '70s                                                               
with staggering  inflation, under  the current  system we  have a                                                               
big problem too.                                                                                                                
                                                                                                                                
MR. STORER:  That's the worst-case scenario,  there's no question                                                               
about it.  For a long  time I've run  models just trying  to find                                                               
what  is the  worst-case scenario.  It gets  postponed for  a few                                                               
years but  you would  have a  big issue  in terms  of maintaining                                                               
purchasing power  and, at least  historically, you would  see low                                                               
returns in bonds and equities during that period as well.                                                                       
                                                                                                                                
SENATOR  THERRIAULT:  So the  current  system  has not  only  the                                                               
instability  of  the  dividend  roller  coaster,  but  it's  more                                                               
susceptible to  hyperinflation and the erosion  that would accrue                                                               
to the fund?                                                                                                                    
                                                                                                                                
MR. STORER:  I believe  it is.  I believe it  is because  of that                                                               
line that  it is  principal that  you cannot  go below  and there                                                               
would  be  -  the  question  was -  it  becomes  would  inflation                                                               
proofing  be abandoned  in that  scenario? I  personally find  it                                                               
hard to  believe it would not  be because the only  way you could                                                               
access income,  or the first  line would be to  abandon inflation                                                               
proofing so  you're no longer  maintaining your  purchasing power                                                               
anyway.                                                                                                                         
                                                                                                                                
SENATOR  THERRIAULT: Mr.  Chairman, it  is  true, as  far as  the                                                               
wording here,  Section 3 is  a one  time deposit of  $4.5 billion                                                               
that the legislature  would be putting before the  people and the                                                               
people would  vote on  [whether] that  $4.5 billion  deposit from                                                               
the earnings reserve would go  into the principal, establishing a                                                               
new level for  principal. So I just wanted to  clarify that. But,                                                               
with regards  to the 5  percent draw,  the language says  you may                                                               
take up  to - it  may not exceed 5  percent. It doesn't  say thou                                                               
shalt take 5 percent each year.  And, in fact, because you've got                                                               
4 or 5-year  averaging, you are actually drawing off  less than 5                                                               
percent. It's  more like  4.75 or 4.8.  Is that  correct? Because                                                               
you've got  a growing fund  - you've  got new resources  that are                                                               
going in,  you've got  inflation proofing going  in, so  when you                                                               
take the  5-year average  of a growing  fund, it's  actually less                                                               
than 5 percent of that year's market value.                                                                                     
                                                                                                                                
MR. STORER: Through the chair,  that's absolutely correct. If you                                                               
look at  the snapshot of  the payout  versus the ending  value of                                                               
the  fund,  it  looks  more  like  around  4  and  three-quarters                                                               
percent.                                                                                                                        
                                                                                                                                
SENATOR THERRIAULT: So  we look back on the  history. The 10-year                                                               
history shows  that from a 10-year  look back that we  could have                                                               
paid the 5  percent and if we want additional  protection, we can                                                               
consider statutory  language or if  somebody wants to  propose or                                                               
come up with a way sensibly  to put it into the Constitution, you                                                               
could have language  that says if you get into  a situation where                                                               
you're  going to  dip  down below  that line,  then  you put  the                                                               
brakes on and your allowable draw is even less.                                                                                 
                                                                                                                                
CHAIR SEEKINS: I think it's very easy  for us - I always - what I                                                               
hear now -  people say is well, it could  erode the principal, we                                                               
could be  dipping into the principal  and that's why I  wanted to                                                               
make it very clear that there's  a $4.5 billion buffer from where                                                               
the fund  is now until  we get to the  principal. So that,  in my                                                               
mind, kind  of satisfies that  argument. And secondly,  you know,                                                               
I'm concerned  about the faults  of the current system  where our                                                               
growing  fund  causes us  to  overspend.  We  can exceed  that  5                                                               
percent  if we  wanted  to  in overspending  and  how  we do  it,                                                               
including  inflation proofing  - inflation  proofing appreciating                                                               
assets,  which  sometimes doesn't  make  that  much sense  to  me                                                               
unless somebody  else is  willing to  do it for  me, but,  when I                                                               
look at  the current method, and  if I try to  characterize - let                                                               
me ask you  a question. How many investment  funds and investment                                                               
managers are just looking ... [END OF SIDE A].                                                                                  
                                                                                                                                
TAPE 04-4, SIDE B                                                                                                             
                                                                                                                                
CHAIR SEEKINS: ... current method of handling endowment funds?                                                                  
                                                                                                                                
MR. STORER: Mr.  Chair, the answer is not many  because there are                                                               
already - rushing to our methodology?                                                                                           
                                                                                                                                
CHAIR SEEKINS: Yes, our current methodology.                                                                                    
                                                                                                                                
MR. STORER:  85 percent of  the endowments, the  universities use                                                               
some  variant of  what we're  proposing.  I'm not  sure that  I'm                                                               
aware of any entity that still  lives off the concept of realized                                                               
income.  Even accounting  standards  changed in  the mid-'90s  to                                                               
recognize that appreciation is income as well.                                                                                  
                                                                                                                                
CHAIR SEEKINS: So  we're not thinking up something new  and a lot                                                               
of other financial  minds have said how can we  best preserve our                                                               
endowment without,  you know,  over the long  term eroding  it to                                                               
nothing? And a  percent of market value methodology  is what they                                                               
have found to be the best way to do that. Am I correct?                                                                         
                                                                                                                                
MR. STORER: That  is correct and there's many  examples in Alaska                                                               
that have adopted the percentage of market value payout as well.                                                                
                                                                                                                                
CHAIR SEEKINS: For example?                                                                                                     
                                                                                                                                
MR. STORER: For example Anchorage.  I was just talking to Senator                                                               
Stedman - Sitka.  I know the University of Alaska  at Fairbanks -                                                               
the foundation for years in Alaska has that methodology.                                                                        
                                                                                                                                
CHAIR SEEKINS: The City of Fairbanks.                                                                                           
                                                                                                                                
MR. STORER:  The City  of Fairbanks has  one. Bob  Bartholomew in                                                               
our office, the  chief operating officer, was just  in Barrow and                                                               
he  said that  they've adopted  the POMV  as well.  I'm not  sure                                                               
whether Valdez has or not.                                                                                                      
                                                                                                                                
CHAIR SEEKINS: Okay. Senator Therriault?                                                                                        
                                                                                                                                
SENATOR  THERRIAULT: Bob,  you're a  fiduciary for  the permanent                                                               
fund so you  understand the fiduciary duty or  obligation. Do you                                                               
think it would  be fair to characterize that if  we had POMV, and                                                               
you  proposed  to  go  to   our  current  system,  would  you  be                                                               
subjecting  yourself to  possible  litigation  for breaking  your                                                               
fiduciary  obligation  - taking  us  to  a  system that  is  more                                                               
subject to the  ups and downs of the markets  and more subject to                                                               
the dangers of high inflation?                                                                                                  
                                                                                                                                
MR. STORER: I'm sorry - if we?                                                                                                  
                                                                                                                                
CHAIR SEEKINS: If we...                                                                                                         
                                                                                                                                
SENATOR THERRIAULT: The POMV.                                                                                                   
                                                                                                                                
CHAIR SEEKINS: If we had the POMV.                                                                                              
                                                                                                                                
SENATOR  THERRIAULT: And  you were  proposing that  we go  to the                                                               
system that we have currently, which  is more of a roller coaster                                                               
and  more subject  to inflation,  would you  possibly be  setting                                                               
yourself  up for  a claim  that  you have  broken your  fiduciary                                                               
obligation?                                                                                                                     
                                                                                                                                
MR. STORER: One  of the keys in a fiduciary  is showing a process                                                               
to make  an informed decision. So  if I was trying  to convert us                                                               
back, I  would - within  that obligation would  be to show  you a                                                               
process that why  - to give you an informed  decision and I don't                                                               
think I  would be breaking  my fiduciary responsibility.  I think                                                               
it would  be a real challenge  though, to convert from  a POMV to                                                               
realized income when you realize  there's so many complexities in                                                               
terms of our  equity portfolio structure and  the appreciation of                                                               
those assets.                                                                                                                   
                                                                                                                                
CHAIR SEEKINS:  If I could reword  that just a little  bit then -                                                               
would recommending  that someone go  from a percentage  of market                                                               
value process,  similar to  one that's  been recommended,  to the                                                               
current  realized   income,  would  it  be   in  compliance  with                                                               
reasonable person responsibilities? I mean you...                                                                               
                                                                                                                                
MR. STORER: It would be a challenge.                                                                                            
                                                                                                                                
CHAIR SEEKINS: It would be a challenge. I'll leave it at that.                                                                  
                                                                                                                                
MR. STORER:  But it would  be - as I  noted earlier, it  would be                                                               
inconsistent with  current accounting  standards. So, one  of the                                                               
challenges  would  be  to say  if  current  accounting  standards                                                               
recognize appreciation  of the assets  as earnings, then  why are                                                               
you  saying that  that doesn't  matter and  only realized  income                                                               
matters? That would be a challenge.                                                                                             
                                                                                                                                
CHAIR SEEKINS:  So if  we divorce ourselves,  if we  separate how                                                               
any distribution would  be used from the process,  the process is                                                               
the  one  that's  most currently  adopted  by  major  endowments,                                                               
financial advisors across the nation if not the world.                                                                          
                                                                                                                                
MR.  STORER: True,  Mr. Chair.  The  permanent fund  is about  27                                                               
years old  now and if  you look  at our statutes  - distribution,                                                               
inflation  proofing,  they're  27   years  old.  We've  [indisc.]                                                               
additions to  try and meet  contemporary investment  standards in                                                               
there  but they're  27 years  old. Our  realized income  statutes                                                               
made sense back then. I think  you've all seen a slide that shows                                                               
how our  asset allocation has  changed. I think our  objective is                                                               
to  create a  permanent  fund  that can  meet  the  needs of  the                                                               
legislature,   the  citizens   of   Alaska,   and  also   address                                                               
contemporary investment  management issues and that's  what we're                                                               
trying to do.                                                                                                                   
                                                                                                                                
CHAIR SEEKINS: Senator French?                                                                                                  
                                                                                                                                
SENATOR FRENCH:  Thank you.  Call me hard  headed but  I'm really                                                               
stuck  on the  inflation proofing  issue and  I think  this chart                                                               
makes  my point  as  well  as it  makes  yours.  I'm not  against                                                               
modernizing the way the fund is  handled, but if this model holds                                                               
true, you  can write  into the  Constitution, you  must inflation                                                               
proof the  fund before distributing  earnings and as long  as you                                                               
are, you know,  over the last five years you  would have beaten 5                                                               
percent - oh, I'm sorry - back  to 1994, to the beginning of this                                                               
chart, you would have beaten 5  percent every single one of those                                                               
10-year  rolling averages  and  so you'd  have  exactly what  you                                                               
want, which  is a  predictable payout, and  exactly what  I want,                                                               
which is concrete inflation proofing.  Am I misunderstanding this                                                               
chart?                                                                                                                          
                                                                                                                                
MR. STORER:  No. That chart -  there'll be some point  where that                                                               
chart will go below the 5 percent.                                                                                              
                                                                                                                                
SENATOR FRENCH: Sooner or later in time.                                                                                        
                                                                                                                                
MR. STORER: Yes.                                                                                                                
                                                                                                                                
SENATOR FRENCH: It just happens.                                                                                                
                                                                                                                                
MR. STORER:  Yes. It will happen.  And, if I arrived  here in May                                                               
of  '83 and  we  were  having this  conversation,  you would  say                                                               
Storer, you're crazy, you can't  achieve it, so that's an example                                                               
and all of that.  The question for all of you  in regards to that                                                               
in  my mind  is predictability  and stability  versus that  piece                                                               
then,  which  would  eliminate  some  of  the  predictability  or                                                               
stability  of  payout, wherever  it  goes.  That's there  in  the                                                               
discussion  point. And  whether  -  how one  wants  to have  that                                                               
decision,  either  have  that  decision  taken  away,  have  that                                                               
decision by statute,  or address it every  year, etcetera, that's                                                               
the debate.  What we're  proposing gives  greater predictability,                                                               
greater  stability to  the payout  over time,  but the  potential                                                               
exists that  at some  time you  could go below  what we  now call                                                               
principal. The  other side  of the coin,  the benefit,  is you're                                                               
not  going to  overspend  in the  good years.  So,  in a  perfect                                                               
world, if it happens in  this environment, you've got the cushion                                                               
to where you never have to go there.                                                                                            
                                                                                                                                
CHAIR SEEKINS:  I think, as a  way of comment, I  think inflation                                                               
proofing is  important but, as  I said  earlier, it's not  a hard                                                               
decision for  me - if  I was going  to inflation  proof my   if I                                                               
couldn't feed my  kids. I think the legislature  deserves to have                                                               
that  kind  of  flexibility  if  we  get  into  that  kind  of  a                                                               
situation. The  state's going bankrupt and  our Constitution says                                                               
we must inflation proof our fund.  I don't think that that's good                                                               
fiduciary responsibility for the  legislature to even think about                                                               
that and  so, in many respects,  when I look, Mr.  Storer, at how                                                               
we  inflation proof  now, we're  inflation proofing  appreciating                                                               
assets, which in  many schools of thought would  not be something                                                               
that most people would do. Am  I again fairly close to correct on                                                               
that?                                                                                                                           
                                                                                                                                
MR.  STORER:  Mr. Chair,  to  use  the  POMV  you don't  need  to                                                               
inflation  proof  it  because  you  are  investing  in  inflation                                                               
proofing  assets so  it  occurs.  The problem  we  have is  those                                                               
inflation  proofing assets,  such as  equities, can  be converted                                                               
into profits  and then  those profits can  be distributed  and so                                                               
POMV  actually   does  memorialize   inflation  proofing   -  the                                                               
appreciation  as  well. The  current  statutes  do not  guarantee                                                               
inflation proofing.  You still have  the same debate  either way,                                                               
which is inflation proof or make a payment.                                                                                     
                                                                                                                                
CHAIR SEEKINS:  In your estimation,  for the coming  fiscal year,                                                               
what would inflation proofing be in total dollars?                                                                              
                                                                                                                                
MR. STORER: I'm going  to say about 575 - I  don't think it's 600                                                               
million. Inflation  is a  bit over  2 percent  right now  and the                                                               
fund is such  - I guess more like 500 million.                                                                                  
                                                                                                                                
CHAIR  SEEKINS: So  $500 million  that we'll  put into  inflation                                                               
proofing, regardless of what other needs the state has.                                                                         
                                                                                                                                
MR. STORER: Correct.                                                                                                            
                                                                                                                                
CHAIR SEEKINS: Thank you. Senator Therriault?                                                                                   
                                                                                                                                
SENATOR THERRIAULT: Thank  you. At looking at this  chart I think                                                               
- something  that this chart also  points out that -  in addition                                                               
to  the  inflation  proofing  we   have  -  the  legislature  has                                                               
continued to put excess money  into the permanent fund and that's                                                               
basically what  the hills - the  peaks are here is  the retention                                                               
in the  fund of excess  dollars above  and beyond the  25 percent                                                               
contribution every year  above and beyond inflation.  If you look                                                               
back  over the  years, of  course, we've  dumped in  billions and                                                               
billions of dollars in just  additional cash deposits too. So the                                                               
allowance over a  long period of time, you know,  coming close to                                                               
this line or  slightly dipping below and then going  back up, you                                                               
made your  extra deposits, you  retained the extra value  here to                                                               
protect  yourself against  that and,  you know,  in addition,  we                                                               
could put something  on the books that would limit  the draw, you                                                               
know put some dampers on the draw  in any period that you did get                                                               
below.                                                                                                                          
                                                                                                                                
MR. STORER:  That is  correct and also  the legislature,  if this                                                               
were the  February 2000 and 25  percent of the fund  was profits,                                                               
the legislature  displayed the discipline  that we're  asking for                                                               
and did  not overspend,  did not  exceed the  5 percent  and that                                                               
gave us the  cushion to work through a very  severe bear market -                                                               
a  3-year  bear  market  to  where  we  were  able  to  make  the                                                               
distributions,  we were  able to  inflation  proof. Why?  Because                                                               
that discipline was there, both  in the special appropriations to                                                               
the fund and  not taking more of the earnings  than is necessary,                                                               
reasonable.                                                                                                                     
                                                                                                                                
CHAIR SEEKINS: Senator Therriault, go ahead.                                                                                    
                                                                                                                                
SENATOR THERRIAULT: Thank  you Mr. Chairman. So  with the current                                                               
situation,  if you  are concerned  about the  legislature eroding                                                               
the value  of the fund,  and we're  getting into a  tight revenue                                                               
scenario and more  and more pressure to come up  with money, with                                                               
that $4.5  billion sitting out  there that can be  realized, that                                                               
should be weighing on your mind I would think.                                                                                  
                                                                                                                                
MR. STORER: It's available for consideration.                                                                                   
                                                                                                                                
CHAIR  SEEKINS: Mr.  Storer,  conceivably  the legislature  could                                                               
establish  - to  answer the  question, the  concern about  eating                                                               
into the  principal of the  fund, which has been  dedicated there                                                               
and I think  is defined legally -  am I correct there  - what the                                                               
principal is?                                                                                                                   
                                                                                                                                
MR. STORER: It is.                                                                                                              
                                                                                                                                
CHAIR SEEKINS: So there's a  legal definition of what we consider                                                               
the principal of the fund.                                                                                                      
                                                                                                                                
MR. STORER: Um-huh.                                                                                                             
                                                                                                                                
CHAIR  SEEKINS: If  we were  to say  okay, as  a legislature,  we                                                               
could take that  principal fund as of the end  of the last fiscal                                                               
year, we could deposit into it  the royalty income that we get in                                                               
from  oil and  natural resources.  And, in  addition to  that, we                                                               
could theoretically  take an average inflation  proofing over the                                                               
last two or three or four - we do 2 years now, don't we?                                                                        
                                                                                                                                
MR.  STORER: We  take 1  year, Mr.  Chair, but  it's the  rate of                                                               
change between the 2 years.                                                                                                     
                                                                                                                                
CHAIR  SEEKINS: We  could add  an inflation  proofing number  and                                                               
establish  a statutory  principal number,  which the  legislature                                                               
could use and say you can't  spend below this line and still keep                                                               
track  of what  the  principal  of the  fund  is after  inflation                                                               
proofing and compare  that to the market value to  be able to see                                                               
whether or not we really  are, through disbursement of the market                                                               
value, eating  into the  principal of  the fund  and use  that as                                                               
legislative guidance.                                                                                                           
                                                                                                                                
MR. STORER: There's any number of  pieces like that - using a 10-                                                               
year rolling average, a 5-year  RIT (ph), redefining principal in                                                               
the statutes, recognizing the impact  of inflation on - principal                                                               
is  a notational  number.  It's a  recordkeeping  number. It  has                                                               
nothing to  do with how  we manage the  money so you  can convert                                                               
that  recordkeeping number  by statute.  My Director  of Finance,                                                               
[indisc.] but  that's okay, because  it's one more thing  to keep                                                               
track of. But that's another way  of doing it and then you'd have                                                               
to change the statutes or address it through statutory change.                                                                  
                                                                                                                                
CHAIR  SEEKINS:  And   by  doing  that  we   could  provide  some                                                               
indication  of the  fiscal responsibility  of the  legislature to                                                               
the people of the state of Alaska as we go forward.                                                                             
                                                                                                                                
MR. STORER: It would be a more rigorous process if that occurs.                                                                 
                                                                                                                                
CHAIR SEEKINS:  Okay. Other  questions? Hearing  none, I  want to                                                               
thank  you very  much, Mr.  Storer, for  coming to  talk with  us                                                               
today and  we will move  next - I think  we're going to  give the                                                               
full committee the  opportunity to take a look  and we'll address                                                               
this when everyone  can be here - Senator Ellis,  Senator Ogan as                                                               
well. So  we'll move on from  SJR 18 and  set it aside and  go to                                                               
[SJR]   19   and   I  see   representatives   here.   We've   got                                                               
Representative Croft, welcome to  the committee, and representing                                                               
Senator  Lincoln, if  you gentlemen  will put  yourselves on  the                                                               
record, welcome  to the  committee and we're  eager to  hear your                                                               
testimony.                                                                                                                      
                                                                                                                                
[The following is a verbatim transcript.]                                                                                       
                                                                                                                                
            SJR 19-CONST. AM: PERMANENT FUND INCOME                                                                         
                                                                                                                                
MR. MARK  STOPHA: Good  morning. For the  record, my  name's Mark                                                               
Stopha, staff  for Senator Georgiana  Lincoln. She's not  able to                                                               
be  here today.  She's  attending  a funeral  for  Chief John  in                                                               
Copper  Center   and  for  approval   of  the   committee  chair,                                                               
Representative  Croft   will  present  SJR  19   and  answer  any                                                               
questions.                                                                                                                      
                                                                                                                                
REPRESENTATIVE ERIC CROFT: And this  is Representative Eric Croft                                                               
from Spenard  and I'm the author  of the House companion  of this                                                               
measure, so  Senator Lincoln asked  me to  be here to  answer any                                                               
questions.  I've learned  enough from  observing the  Senate over                                                               
the  last 8  years that  sometimes the  Senate wants  to act  and                                                               
sometimes it  wants to  talk and I'll  do whichever  the Chairman                                                               
wants this morning.                                                                                                             
                                                                                                                                
CHAIR SEEKINS:  Mr. Croft,  why don't  you do  what you  think is                                                               
best for  your position  at the  moment and  we'll hear  and then                                                               
we'll ask questions.                                                                                                            
                                                                                                                                
REPRESENTATIVE  CROFT:  Okay.  The   bill  before  you,  SJR  19,                                                               
protects the  permanent fund dividend. It  protects the inflation                                                               
proofing of  the fund and it  provides that the earnings  may not                                                               
be  used.  It's  hard  to  talk   about  this  in  a  vacuum  and                                                               
particularly  in light  of the  discussion we've  just had  about                                                               
percent of market  value. We introduced it - the  House bill over                                                               
on my side and Senator Lincoln,  the Senate bill, as an effort to                                                               
reassure  Alaskans that  their dividend  would  always be  there,                                                               
and,  in  particular that  the  current  fiscal structure  -  the                                                               
current dividend  structure that reflects the  market performance                                                               
of the  fund in  the dividend,  we thought  then and  continue to                                                               
think is appropriate.   In addition, I  think inflation proofing,                                                               
and  possibly  we  just  disagree   Mr.  Chairman,  is  the  most                                                               
important aspect of  the fund, that it provides  that my children                                                               
have the  same buying power  of the  fund, have the  same choices                                                               
available to them that we have  today. To inflation proof at less                                                               
than  the actual  rate  of  inflation I  believe  steals from  my                                                               
children those very  choices. I want this debate  to be happening                                                               
10 years and 50  years from now on what's the  proper use for the                                                               
permanent fund earnings and have  them have that same debate with                                                               
the same  effective real  buying power. So,  possibly we're  at a                                                               
situation of  sort of core  fundamental disagreement.  This would                                                               
protect a  structure that  has served  well to  provide dividends                                                               
for  Alaskan  citizens and  protect  an  inflation proofing  that                                                               
protects the  actual real value  of the  fund and protects  it by                                                               
inflation proofing  at the real  observed actual  inflation rate,                                                               
not a rate we can assume.                                                                                                       
                                                                                                                                
Percent of  market value, while  it has certain aspects  that are                                                               
in its favor, certain aspects  that are positive, assumes that we                                                               
can  guess what  is  going to  happen over  the  next 100  years,                                                               
assumes  from  the  last  100 years  of  market  performance  and                                                               
inflation  performance,  that over  the  average  it has  been  3                                                               
percent inflation  over the  last long  extended period  of time.                                                               
And over  that same period of  time, the market has  been able to                                                               
perform at about 8 percent, that  therefore we can, over the next                                                               
100  years, take  the difference,  take 5  percent. I  don't know                                                               
that. I  think if  I knew  what the  market performance  would be                                                               
over the  next 100 years  and knew  what inflation would  be over                                                               
the next 100  years, that I'd be  making a lot more  money than I                                                               
am today. I think  there are a lot of people who,  if I could say                                                               
I know absolutely what that will  be, who'd be very interested in                                                               
that number. We don't know. We're  talking about a period of time                                                               
that was  the Dow Jones  Industrial Average where it  was largely                                                               
an  American  phenomenon  in   a  pre-industrial  and  industrial                                                               
setting.  I don't know what a  global DOW - as the stock markets,                                                               
ours and  the worlds, become  more global as the  economy becomes                                                               
more  global  and becomes  more  high  technology, I  don't  know                                                               
whether those 8 percent returns are  going to continue to exist -                                                               
be lower  or higher. I don't  want to bet the  real earning power                                                               
of the fund  on that experience. I don't think  we know enough to                                                               
do that. I'm much more  comfortable inflation proofing every year                                                               
by the actual inflation that we  saw. Mr. Storer, when he was up,                                                               
talked  about we  hope we  don't see  the '70s  again. I  hope we                                                               
don't either but if  we take - I mean if we're  going to take the                                                               
percent of market value construction,  that we can look back over                                                               
the  last 100,  80, 50  years, and  say that  is going  to repeat                                                               
itself,  then  we have  to  assume  that  things like  the  Great                                                               
Depression and the  '70s recession are going to  happen. And when                                                               
those things do  happen, and you have 8 or  10 percent inflation,                                                               
you  continue  under percent  of  market  value to  pretend  that                                                               
inflation  was 3  percent. We  have had  those periods  before. I                                                               
think we  have to assume that  we will again and  under a percent                                                               
of  market  value  formulation,  we  would  be  eating  into  the                                                               
principal.                                                                                                                      
                                                                                                                                
I listened to  the discussion up here. I looked  at yesterday the                                                               
earnings reserve balance of the  permanent fund. It's around $900                                                               
million.  The  great $4.5  billion  you're  talking about  is  in                                                               
unrealized gains.  According to the  most recent AG  opinion from                                                               
Attorney General Renkes,  that should be put  into the principal.                                                               
I'm not  sure whether that's  the right  legal opinion but  it is                                                               
the legal opinion that the permanent fund is operating on.                                                                      
                                                                                                                                
CHAIR SEEKINS: I  don't agree with your  interpretation but we'll                                                               
put it on the record for you.                                                                                                   
                                                                                                                                
REPRESENTATIVE CROFT:  Okay. Individuals,  I guess,  can disagree                                                               
on that.  I've read that  opinion a  number of times.  I disagree                                                               
with whether  the opinion is  right legally but I  believe that's                                                               
what it says.                                                                                                                   
                                                                                                                                
CHAIR  SEEKINS:  I  think  it's counted  into  principal  but  it                                                               
doesn't require that it be  deposited into principal. I mean it's                                                               
counted in terms  of the calculation, that's how  I would portray                                                               
it.                                                                                                                             
                                                                                                                                
REPRESENTATIVE CROFT:  You might have a  brilliant career forward                                                               
in the  legal profession, Mr. Chairman,  because that distinction                                                               
evades even me.                                                                                                                 
                                                                                                                                
CHAIR  SEEKINS: Well,  I can  understand how.  Please, I'm  being                                                               
facetious, just having some fun there.                                                                                          
                                                                                                                                
REPRESENTATIVE CROFT:  The fundamental  aspect of the  percent of                                                               
market value that  disturbs me is that presupposing  what we know                                                               
what  inflation  will  be  and pretending  that  it's  that  and,                                                               
frankly, the  portion, and you've referred  to it in some  of the                                                               
testimony  before, that  deletes  the word  'principal' from  our                                                               
Constitution. We  put it  in there  in the  '70s. We're  going to                                                               
take it  out. I  think it  would be better  and a  sounder fiscal                                                               
policy to  start by reassuring  people that their  dividend won't                                                               
be  touched,  reassuring  people that  real  inflation  proofing,                                                               
inflation  proofing  at the  rate  that  actually occurred,  will                                                               
happen and that's  what the bill before you does.  I can see that                                                               
the....                                                                                                                         
                                                                                                                                
CHAIR  SEEKINS: Senator  Therriault  has a  question  and if  you                                                               
don't object,  as we  go along,  we like  to ask  questions while                                                               
they're fresh in the minds of our members.  Senator Therriault.                                                                 
                                                                                                                                
SENATOR THERRIAULT:  I don't  think you  can guarantee  those two                                                               
things that you  just said you want to guarantee.  I believe that                                                               
I tend to agree probably more -  fall on the side of the spectrum                                                               
with -  that you're  on, as  far as  the importance  of inflation                                                               
proofing. But we've  just heard from Mr. Storer that  we can have                                                               
a  situation in  a down  equity market  but continue  real estate                                                               
earnings that  come in  that have  to be paid  out as  a dividend                                                               
that could in  fact erode the principal of the  permanent fund if                                                               
we  didn't have  that  buffer  that we  talked  about. So  you're                                                               
desiring to have absolutely guaranteed  two things that under the                                                               
current situation, I don't think you can.                                                                                       
                                                                                                                                
CHAIR SEEKINS: Please go right ahead.                                                                                           
                                                                                                                                
REPRESENTATIVE  CROFT: I  listened  to the  entire testimony  for                                                               
that reason.  What Mr.  Storer said  was that  you could  reach a                                                               
situation where you  couldn't pay out dividends  and you couldn't                                                               
inflation  proof  because  you'd  gotten to  the  bottom  of  the                                                               
barrel. At  that point, and  because of market  performance after                                                               
that, you  could have a  book value of  less than principal  - it                                                               
could be negative for  a while. All that is true  and what you do                                                               
in that  situation is you  stop spending. That's  the appropriate                                                               
response when you've  hit the bottom of your  savings account and                                                               
that's not  what happens in percent  of market value   - you keep                                                               
spending, in  fact you keep  spending at 5 percent  assuming that                                                               
things are happening that are not happening in the real world.                                                                  
                                                                                                                                
CHAIR SEEKINS:  You mean  the bottom of  your savings  account or                                                               
this line below, which you  should not participate. The bottom of                                                               
the savings account  means it's all gone to me.  How did you mean                                                               
that?                                                                                                                           
                                                                                                                                
REPRESENTATIVE  CROFT: The  bottom  of the  checking account  and                                                               
maybe you still  have savings that you declared  you're not going                                                               
to get into yet.                                                                                                                
                                                                                                                                
SENATOR THERRIAULT:  It seems  to me  if you get  down to  a poor                                                               
market  situation, in  fact we  almost got  to a  point where  we                                                               
didn't have  money to  pay a  dividend within  the last  year and                                                               
there  were bills  that  were introduced  to pay  it  out of  the                                                               
regular state treasury because it got  so close. But I think that                                                               
one of  the things that Mr.  Storer was alluding to  is you still                                                               
would  have real  estate earnings  coming in  so you  have income                                                               
that goes into  the calculation of your dividend but  you have no                                                               
money. The first money to go  is the inflation proofing. The very                                                               
thing  that  you  said  should  be  paramount.  I  agree  if  the                                                               
permanent fund is the mechanism is  to be a mechanism of taking a                                                               
one-time revenue  stream and making it  truly multi-generational,                                                               
you should  put inflation  proofing as your  number one  goal. It                                                               
should  be paramount  to  everything else  but  with what  you're                                                               
proposing  here when  you get  into  a bad  situation, the  first                                                               
thing to go is the inflation proofing.                                                                                          
                                                                                                                                
REPRESENTATIVE  CROFT:  This  constitutional  amendment  protects                                                               
inflation proofing and....                                                                                                      
                                                                                                                                
SENATOR THERRIAULT: I don't see inflation proofing in here.                                                                     
                                                                                                                                
REPRESENTATIVE  CROFT:   The  statutes  that  we   put  into  the                                                               
Constitution  that we  say -  AS  37.13.140, .145,  and 23.025  -                                                               
13.145 is  the inflation  proofing statute and  then when  we add                                                               
Section  2 that  says  that you  can't amend  them  as they  were                                                               
effective on 2002, that says dividend....                                                                                       
                                                                                                                                
SENATOR THERRIAULT:  What happens  when we  get into  a situation                                                               
where we  don't have the  money under  the current system  to pay                                                               
them both. Which one gets paid?                                                                                                 
                                                                                                                                
REPRESENTATIVE CROFT: What  you should do when you  reach the end                                                               
of your principal  and you get down - and  principal just means a                                                               
number below which we don't want  to fall, below which we want to                                                               
stop doing business  as usual, and in this system  you do stop. I                                                               
mean I can't protect....                                                                                                        
                                                                                                                                
CHAIR SEEKINS: In which system - the 19?                                                                                        
                                                                                                                                
REPRESENTATIVE    CROFT:    The    current    system    protected                                                               
constitutionally  as  SJR 19  would  do.  I can't  guarantee  you                                                               
market  performance that  will  always allow  us  a dividend  and                                                               
inflation proofing.  Nobody can.  I can,  though, write  a system                                                               
that  says  we  will do  that  each  year  and  when we  hit  the                                                               
principal number that  we don't want to fall below,  we've got to                                                               
stop. You  have no question in  my opinion, and you  wait for the                                                               
markets to  rebound. And then  when you  do, you pay  those back.                                                               
You start paying  dividends again and you pay  back the inflation                                                               
at  the  real amount.  Percent  of  market value  would  continue                                                               
through that entire time, pretending  we could pay out 5 percent,                                                               
eroding principal and  continuing to operate as  though there was                                                               
something normal about that.                                                                                                    
                                                                                                                                
CHAIR  SEEKINS: Percent  of market  value  does not  mandate a  5                                                               
percent payout.  It limits it  to 5  percent based on  the fiscal                                                               
responsibility of the legislature. Senator Therriault?                                                                          
                                                                                                                                
SENATOR THERRIAULT: Thank  you Mr. Chairman and  I think language                                                               
can be,  as we  discussed earlier,  developed that  would prevent                                                               
that from happening.  But you say we've got  the current dividend                                                               
payout system and  we've got inflation proofing.  When money gets                                                               
tight, which  one gets paid? Is  it prorated between the  two? If                                                               
you only got  enough money to pay a portion,  which one gets paid                                                               
- inflation  proofing or  a dividend  under this  language? Which                                                               
one takes precedent?                                                                                                            
                                                                                                                                
REPRESENTATIVE  CROFT: Right.  Under  the  current structure  and                                                               
under the  structure we incorporate  here in  SJR 19, if  you get                                                               
down to that  point, you keep dividends. It's  a calculation that                                                               
you and I have been through.                                                                                                    
                                                                                                                                
SENATOR  THERRIAULT: Right  - you  keep  dividends. So  inflation                                                               
proofing, the  very thing that you  said to be paramount,  is now                                                               
secondary.                                                                                                                      
                                                                                                                                
REPRESENTATIVE CROFT:  It's secondary  to dividends  and superior                                                               
to everything else.                                                                                                             
                                                                                                                                
SENATOR THERRIAULT: It's secondary  to dividends and, for myself,                                                               
that's a  problem.  Another  question. In addition, Section  2 on                                                               
page 2,  lines 5 through  8, you talk  about an allowance  for an                                                               
appropriation, above  and beyond B  and C sections, that  I guess                                                               
would  just  be a  majority  vote  of  the legislature  and  then                                                               
ratification of the  state voters and that would come  out of the                                                               
earnings  reserve.  So you  are  allowing  for spending  here  in                                                               
addition to the dividends and the inflation proofing.                                                                           
                                                                                                                                
REPRESENTATIVE   CROFT:   Well,   through  the   chair,   Senator                                                               
Therriault, we  saw that  as a protection.  Of course  they could                                                               
spend  now but  this would  require that  the people  approve any                                                               
spending out of the earnings reserve.                                                                                           
                                                                                                                                
SENATOR THERRIAULT:  The people  that year.  So with  pressure on                                                               
the budget,  and the  public demand for  dividends, where  do you                                                               
think  the  dollars  are going  to  go?  Is  it  going to  go  to                                                               
inflation proofing?                                                                                                             
                                                                                                                                
REPRESENTATIVE CROFT:  Well, and  that became  the final  sort of                                                               
point  in the  discussion  here  before, the  idea  that we,  the                                                               
people or  we, the legislature,  would fail in our  commitment on                                                               
inflation proofing. I happen to  think inflation proofing is very                                                               
popular publicly and I think it should  be. I hope it still is in                                                               
this  legislature. I  think  keeping the  earning  power for  our                                                               
future generations will win politically  but the provision you're                                                               
talking about doesn't  have to do with either. It  has to do with                                                               
putting  another protection  against  getting  into the  earnings                                                               
reserve and  that government use  of the earnings reserve  is, in                                                               
the long run, as big a  threat to inflation proofing as dividends                                                               
as  the market  - government  getting in  and taking  substantial                                                               
amounts of  the earnings reserve is  what drives you to  the very                                                               
situations you were talking about, of  having no money and how do                                                               
we choose between  dividend and inflation proofing.  We wanted to                                                               
set  one  more protection  to  make  sure that  earnings  reserve                                                               
stayed healthy and  it wasn't used for government.  If the people                                                               
say  that they  want to,  that's their  choice but  we not  do it                                                               
ourselves.                                                                                                                      
                                                                                                                                
CHAIR SEEKINS: Go ahead, Senator Therriault.                                                                                    
                                                                                                                                
SENATOR  THERRIAULT:   Mr.  Chairman,  this  mechanism   by  just                                                               
enshrining  the statutes,  which  we've also  had testimony  that                                                               
says we're 27 years down  the track. We've changed our investment                                                               
strategy  and now  we're  trying to  freeze  these statutes  that                                                               
haven't kept  pace with the  means by which we  generate revenue.                                                               
It just  seems that to  suggest that this  is a better  way, when                                                               
clearly  you get  into a  situation where  you don't  have enough                                                               
money  so you're  going to  have  to pick  between dividends  and                                                               
inflation proofing,  you could have  an appropriation  because of                                                               
budgetary  pressure   that  could   also  take   precedence  over                                                               
inflation  proofing, leaving  nothing for  inflation proofing.  I                                                               
think  with a  segment  of the  state  population, the  inflation                                                               
proofing  is  very important,  but  we've  also got  a  transient                                                               
section  of  the  state  population  that  carrying  forward  the                                                               
purchasing value for the next  generation, they don't care a bit.                                                               
I've  heard from  - I  have one  constituent that  I just  had to                                                               
agree to  disagree with and  he said  you know nobody  looked out                                                               
for  my  generation so  let  the  next  generation look  out  for                                                               
themselves.  I completely  disagree with  that and  I think  that                                                               
truly we  should go toward  something that really  does guarantee                                                               
that we  preserve the purchasing  power. And although  POMV might                                                               
not be  100 percent, it sure  seems like it's a  whole lot better                                                               
than what we've currently got.                                                                                                  
                                                                                                                                
CHAIR  SEEKINS:  And   we'll  go  to  Senator   French  next  but                                                               
purchasing power that doesn't meet needs is useless.                                                                            
                                                                                                                                
REPRESENTATIVE CROFT: Doesn't meet? Sorry Mr. Chairman?                                                                         
                                                                                                                                
CHAIR SEEKINS:  Purchasing power  that doesn't  meet any  need is                                                               
useless.  What are  we trying  to preserve  purchasing power  for                                                               
future generations  if we  can't feed our  kids today  and that's                                                               
where you and I  probably basically philosophically disagree. I'd                                                               
feed my  kids before I'd  inflation proof my savings  account. So                                                               
that's not a  hard decision for me  in that case. When  I look at                                                               
projected  shortfalls in  general fund  versus expenditures,  you                                                               
know, we're shooting  for a number around $400  million and we're                                                               
going to put  $500 million first into inflation  proofing. How do                                                               
people want  to spend their  money? Do they  want to spend  it to                                                               
inflation proof and then we tax  them and take it away from them?                                                               
There are  a lot  of questions there  that become  very debatable                                                               
when the reality  hits the pocketbook and so I'm  not so sure how                                                               
people would  react. I  know how  my wife would  react if  I said                                                               
baby, we're  going to put  the money  in our savings  account and                                                               
you don't have anything to go  buy groceries to feed the kids and                                                               
grandkids. There'd  be a revolution  in the house.  So, sometimes                                                               
the  legislature has  to  live up  to  its fiscal  responsibility                                                               
without  undue restraint  and I  think they've  got a  good track                                                               
record of  doing that. I  haven't been here  as long as  you, but                                                               
the track record  has been good. It's been admirable  and I think                                                               
to  some respect  anything  that  we do  that  unduly limits  the                                                               
ability  for the  legislature to  act in  a fiscally  responsible                                                               
manner in the face of  uncertainties, as you mentioned are surely                                                               
going to come, puts us in a  position where if we don't know, why                                                               
do  we want  to  eliminate  the ability  for  the legislature  to                                                               
respond appropriately? That's where  I get into problems. Senator                                                               
French?                                                                                                                         
                                                                                                                                
9:37 a.m.                                                                                                                       
                                                                                                                                
SENATOR FRENCH:  I think one  of the remarkable things  about the                                                               
current set  of statutes is the  degree to which the  public kind                                                               
of gets how the system works.  When the dividend went from $1,900                                                               
just  a few  years  ago down  to  $1,000 this  year,  none of  my                                                               
constituents  were  squealing  about,  you  know,  some  kind  of                                                               
terrible  inequity in  the system.  They understood  that it  was                                                               
just  a  down  market  year  and   I  think  that's  one  of  the                                                               
difficulties  with POMV  that proponents  haven't  quite come  to                                                               
grips with  that somehow  POMV implies  stability, that  you will                                                               
have this money paid out  every year irrespective of the market's                                                               
performance and  yet there's  sort of  that little  language that                                                               
says you  can go up  to 5 percent  as if  there were going  to be                                                               
years when we wouldn't do that.                                                                                                 
                                                                                                                                
CHAIR SEEKINS: Well we did that in 1996, Senator French.                                                                        
                                                                                                                                
SENATOR FRENCH: I was almost finished.                                                                                          
                                                                                                                                
CHAIR SEEKINS: Go ahead.                                                                                                        
                                                                                                                                
SENATOR FRENCH:  So I guess  the point I  was trying to  make was                                                               
that there's some  real good value in  maintaining something very                                                               
much like  the current  statutes because of  the degree  to which                                                               
the public  understands that  sometimes there  [are] going  to be                                                               
years when you just don't get  a dividend because the market just                                                               
didn't  provide one.  So I  think that's  - I  just think  that's                                                               
worthy of making note of.                                                                                                       
                                                                                                                                
CHAIR SEEKINS: I  have no problem with  that but we did  - in our                                                               
current  system,  we did,  I  would  call it,  hyper-inflate  the                                                               
dividend in 1996. The decision was  made by the Board of Trustees                                                               
that the current  generation should, this was  the rationale, the                                                               
current generation  needed to  get more  from the  permanent fund                                                               
than it was getting through  the regular distribution system, the                                                               
dividend system.  So, investment  management companies  were told                                                               
to go sell stocks  to bring in realized income to  be able to put                                                               
more  cash into  the  dividend for  the  current generation.  Now                                                               
whether that  was the real reason  or not is debatable,  but that                                                               
was the rationale  that was used. It was done.  We had additional                                                               
income  that came  in that  peaked and  then went  right back  in                                                               
terms of realized income and  so, sometimes, it isn't just market                                                               
variability that  affects the dividend under  the current system,                                                               
Senator   French,  it's   also  political   variability.  Senator                                                               
Therriault?                                                                                                                     
                                                                                                                                
SENATOR  THERRIAULT:  Mr.  Chairman,  I  need  to  disagree  with                                                               
earlier  comments here  about  people  understanding the  current                                                               
system and the value of that.  Certainly last year when there was                                                               
the real  potential that  there would be  no dividend,  there was                                                               
enough of  a concern in this  building of, number one,  the shock                                                               
to  the  citizen,  the  shock  to the  economy  that  there  were                                                               
proposals  to pay  it out  of the  general state  treasury. So  I                                                               
don't think  the general  public has  any level  of understanding                                                               
that really, in the current  system, that there's the chance that                                                               
there is  a zero  dividend year.  And certainly  for those  of us                                                               
that know the potential impact  to the state treasury, that's not                                                               
something that we  would invite so I'm  not going to -  I guess I                                                               
can't  agree with  that line  of  thinking when  there are  other                                                               
alternatives that  make sure that  that stream of cash  that goes                                                               
out into the Alaska economy is  smooth and you get the by-product                                                               
of guaranteeing  that inflation proofing  of some degree  is made                                                               
automatically independent  of action of the  legislature. I don't                                                               
think that  the general  public understands that  they can  get a                                                               
zero dividend year in the current system.                                                                                       
                                                                                                                                
CHAIR SEEKINS:  Right. I think  that's true,  too. When I  was on                                                               
the Board of  Trustees it didn't take me very  long to figure out                                                               
that the Board  of Trustees can play God with  the permanent fund                                                               
and what  the dividend's  going to  be. And in  a year  where the                                                               
earnings  reserve  was  very  low   and  you're  faced  with  the                                                               
possibility of  not having the cash  to inflation proof or  pay a                                                               
dividend,  there  will  certainly   be  a  tremendous  amount  of                                                               
political  pressure to  maybe pick  some fruit  that isn't  quite                                                               
ripe yet in  order to get the cash from  realized earnings to put                                                               
into  the  earnings  reserve  account  when  a  more  disciplined                                                               
investment strategy  would say it's  not time to pick  this fruit                                                               
yet  but we  need the  money. So,  you know,  I can  see how  the                                                               
current  system  lends itself  to  all  kinds of  abuse.  Senator                                                               
Therriault?                                                                                                                     
                                                                                                                                
SENATOR  THERRIAULT:   The  section,   for  either  one   of  the                                                               
gentlemen,  that  allows  for an  appropriation  for  other  than                                                               
inflation   proofing   and   dividends  -   was   that   language                                                               
specifically left  or put in  here so  that you could  answer the                                                               
legal question of whether you've still got a public purpose?                                                                    
                                                                                                                                
REPRESENTATIVE CROFT: Through the  Chair, Senator Therriault, no,                                                               
my purpose  for putting  it in, and  I believe  Senator Lincoln's                                                               
was  to provide  another  check on  government  getting into  the                                                               
earnings reserve. I think that  the legal matter of whether we're                                                               
a  tax free  status has  been  at least  in my  mind fairly  well                                                               
settled.  The  recent opinion  by  Attorney  General Renkes  that                                                               
constitutionally  protecting  the  dividend didn't  threaten  the                                                               
tax-exempt status  of the fund  - in effect,  if it was  a public                                                               
purpose when you  did it statutorily, it's a  public purpose when                                                               
you do  it constitutionally. And a  lot of the case  law that has                                                               
come  down  over  the  last   five  years  that  buttresses  that                                                               
agreement  or that  understanding, particularly  in the  areas of                                                               
educational trusts,  where private money  comes in and  the state                                                               
holds it  and gives it out  to go to the  state university, those                                                               
sorts of  cases have really taken  that from what was  a question                                                               
mark and  a worry for  a long time -  nothing is certain  in life                                                               
but much more of a certainty that that's not a serious question.                                                                
                                                                                                                                
SENATOR THERRIAULT: Okay,  well I just know from  the debate over                                                               
the years,  it seems  like if  you can  still point  to something                                                               
where there is a general  public access, you have some protection                                                               
from  the federal  court because  they can  say well,  you're not                                                               
using  the money  for that  purpose  right now  but there's  that                                                               
possibility so it  gives you a little bit of  extra protection so                                                               
I just wondered if that was part  of the reason that you put that                                                               
in there because you've got this  whole Section 3 here that talks                                                               
about oops, if  there's an adverse tax consequence,  we want this                                                               
whole  thing to  go away.  So you  must feel  like there  is some                                                               
possibility of that, otherwise you wouldn't have Section 3.                                                                     
                                                                                                                                
REPRESENTATIVE  CROFT:  True  enough.   And  through  the  Chair,                                                               
Senator Therriault,  the House  version we took  it out  over the                                                               
last couple  of months,  after those opinions  came down.  When I                                                               
talked to Senator  Lincoln about it, she said that  that would be                                                               
a  perfect question  for the  Judiciary Committee  and up  to you                                                               
guys  to decide.  I do  think  the case  law has  come down  much                                                               
cleaner on  the point  that it  is not  needed. If  the Judiciary                                                               
Committee felt  like that was  their opinion, they could  take it                                                               
out. If  they still  wanted the protection,  they could  leave it                                                               
in.                                                                                                                             
                                                                                                                                
SENATOR THERRIAULT: Do you yourself  think that would be prudent?                                                               
I mean  with the uncertainty of  getting a tax ruling  out of the                                                               
federal  courts and  then us  being  stuck with  language in  the                                                               
Constitution and we  know it's a high hurdle to  change it, would                                                               
it be prudent not - to go without this protection?                                                                              
                                                                                                                                
REPRESENTATIVE CROFT: I  was convinced enough that  in my version                                                               
of the  bill I  was comfortable pulling  it out but  it is  a low                                                               
risk, but a risk, and I really  do feel like you guys can decide.                                                               
As for me,  after reading and re-reading the cases,  not just the                                                               
memo  that  was   sent  to  Attorney  General   Renkes,  but  the                                                               
underlying  cases, I  felt very  confident that  it was  a public                                                               
purpose and would not be taxable. But,  we had it in there to fit                                                               
your comfort level.                                                                                                             
                                                                                                                                
SENATOR THERRIAULT: Thank you.                                                                                                  
                                                                                                                                
CHAIR  SEEKINS: Other  questions?  Senator French,  did you  have                                                               
anything?  Senator Therriault?  Thank  you  gentlemen, if  you'll                                                               
stand by  I do  have one  person who  has indicated  on-line that                                                               
he'd like  to testify  and, if  you don't mind,  if you  can just                                                               
hang tough  where you are so  we can go  into this. Is Mr.  Gay -                                                               
Roger Gay, at  the Mat-Su LIO -  Mr. Gay, are you  on-line? Do we                                                               
have him on-line still?                                                                                                         
                                                                                                                                
MR. ROGER GAY: Hello. Can you hear me?                                                                                          
                                                                                                                                
CHAIR  SEEKINS:  Please,  if you'll  identify  yourself  for  the                                                               
record?  Welcome to  the Judiciary  Committee and  please proceed                                                               
with your testimony.                                                                                                            
                                                                                                                                
MR. GAY: My  name is Roger Gay.  I live in Big Lake  and I'd like                                                               
to  say  a  little  something about  inflation  proofing.  In  my                                                               
opinion, inflation  proofing does  not protect  the value  of the                                                               
fund. It merely subjects more  money to the ravages of inflation.                                                               
Inflation is  the result of  the devaluation of our  money. Every                                                               
year our money is worth less, and  that is why the price of goods                                                               
goes up. A loaf  of bread is a loaf of bread. A  gallon of gas is                                                               
a gallon of  gas. We can make  bread and gas cheaper  now than at                                                               
any point  in history. Only  the money has become  less valuable.                                                               
Because of  the Federal Reserve System  and the way our  money is                                                               
handled, our money  has no intrinsic value. When you  have a huge                                                               
permanent fund  being subjected  to I  don't know  how much  of a                                                               
loss due to  inflation, if you take that amount  and dump it back                                                               
into the  fund, that  amount then  becomes subject  to inflation.                                                               
I'm  not suggesting  that we  spend everything  today at  today's                                                               
prices, which would be the best way  to get the full value of our                                                               
money.  But  the idea  of  taking  money  that  has been  hit  by                                                               
inflation  and  fooling yourselves  into  thinking  that you  can                                                               
protect  it by  dumping  more  money into  it  to  be ravaged  by                                                               
inflation just  doesn't make sense.  You know we're losing  a lot                                                               
of money to inflation because our  money is not stable and if you                                                               
want  to inflation  proof, you  have to  work at  stabilizing the                                                               
value of our money.                                                                                                             
                                                                                                                                
CHAIR SEEKINS: Senator Therriault?                                                                                              
                                                                                                                                
SENATOR  THERRIAULT:   I  understand  your  point.   However,  to                                                               
stabilize the  value of  our money is  a national  economic issue                                                               
that  I don't  know that  the State  of Alaska  has the  power to                                                               
control.  But if  that's a  given, then  that's something  that's                                                               
largely outside  of our individual  legislative control.  [END OF                                                               
TAPE.]                                                                                                                          
                                                                                                                                
TAPE 04-5, SIDE A                                                                                                             
                                                                                                                                
SENATOR THERRIAULT: So should we not do that?                                                                                   
                                                                                                                                
MR.  GAY: You're  not having  any effect  on inflation  by taking                                                               
more money  out of the hands  of whoever, whether it's  the state                                                               
or  the  people.  You're  not having  any  affect  whatsoever  on                                                               
inflation by throwing more money into  the fund under the name of                                                               
inflation proofing. Inflation proofing is an oxymoron.                                                                          
                                                                                                                                
SENATOR THERRIAULT: Thank you.                                                                                                  
                                                                                                                                
CHAIR SEEKINS:  Other questions? Seeing  none, thank you  Mr. Gay                                                               
for being with  us this morning and providing  your testimony. Is                                                               
anyone else on  line that wishes to testify this  morning? No one                                                               
else?  Anyone in  the audience  that  wishes to  testify on  this                                                               
matter this morning?                                                                                                            
                                                                                                                                
MR. GAY: I have a friend of mine  that would like to make a brief                                                               
comment and his name is Gary Hanthorn.                                                                                          
                                                                                                                                
CHAIR SEEKINS: Is Gary there?                                                                                                   
                                                                                                                                
MR. GAY: Yes he  is and he has a mental  disability but he'd like                                                               
to say a short word.                                                                                                            
                                                                                                                                
CHAIR SEEKINS:  If he'll identify  himself for the  record, we'll                                                               
be pleased  to take  his testimony and  Mr. Hanthorn,  welcome to                                                               
the Judiciary Committee.                                                                                                        
                                                                                                                                
MR. HANTHORN: I'm Gary. Could  you leave my permanent fund alone?                                                               
It's mine.                                                                                                                      
                                                                                                                                
CHAIR SEEKINS: Thank you very much, Gary. Any questions?                                                                        
                                                                                                                                
MR. HANTHORN:  Could you  tell Mr.  Kohring to  give me  a letter                                                               
because  [indisc.]  and he's  supposed  to  get  back to  me  for                                                               
something about my permanent fund being left alone.                                                                             
                                                                                                                                
CHAIR SEEKINS:  Well we  can't answer for  Mr. Kohring  here, but                                                               
you're  certainly  welcome to  call  his  office. They  have  the                                                               
number there in the LIO and I would encourage you to do that.                                                                   
                                                                                                                                
MR. HANTHORN: Thank you.                                                                                                        
                                                                                                                                
CHAIR SEEKINS: Thank you for  testifying this morning. With that,                                                               
hearing no  one wishing to  testify, we're going to  close public                                                               
testimony  on  SJR  19.  Are there  any  discussion  points  with                                                               
members of  the committee?   None? Seeing  none, we'll  hold this                                                               
over  for a  time  when  the entire  committee  can  be here  for                                                               
discussion. I want to thank you  gentlemen for being with us this                                                               
morning. We  appreciate your testimony and  the lively discussion                                                               
and look forward to getting in  this in the next - sometime soon.                                                               
With  that,  we  have  no other  business  before  the  Judiciary                                                               
Committee  this  morning  and  so  we'll  adjourn  the  Judiciary                                                               
Committee at this time [9:51 a.m.].                                                                                             

Document Name Date/Time Subjects